Conventional Business Loans vs SBA Loans

By Susan Guillory · May 30, 2024 · 8 minute read

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Conventional Business Loans vs SBA Loans

Getting your business the funds it needs to grow (or even just to get through a slow period) can be essential for its success. But when it comes to choosing the right financing product to get those funds, you can feel overwhelmed by the potential options you see. You may encounter everything from bank loans to online loans to business credit cards — and more.

In the end, if your credit is decent and your business is well-established, you may well find you’re trying to choose between a conventional business loan or a Small Business Administration (SBA) loan. Here, learn the pros and cons of each to help you make the right decision for your enterprise.

What Is a Conventional Business Loan?

A conventional business loan, or conventional bank loan, is offered by — you guessed it — a bank or credit union to a business. Among all of the many types of business loans, this one often has the most demanding qualification requirements, which may include being in business for a certain number of years and a minimum personal and/or business credit score.

How Does Conventional Lending Work?

Like many other small business loans, a conventional business loan provides a fixed sum based on an applicant’s qualifications. A business that has been operating for 10 years or more and has an excellent credit score may be eligible to borrow more than a business that’s been in existence just two years and has a good credit score.

Once a loan has been funded, the lender gives the borrower a payment plan. Each payment typically includes portions of both the principal of the loan and interest. Typically, the repayment period (called the loan term) is between one and five years. However, long-term business loans from banks can have terms as long as 10 years.

The interest rate charged is also based, in part, upon the applicant’s qualifications. The better your credit history, generally, the lower the interest rate will be. Interest rates also vary depending on whether or not you put down collateral (such as equipment, real estate, or another asset) to secure the loan. Secured vs. unsecured loans tend to have lower rates, since the bank can seize the asset to cover what you owe should you default on the loan.

An unsecured loan may require a personal guarantee. This is a written promise that if your business isn’t able to pay back the loan, you personally will pay it.

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What Are SBA Loans?

SBA loans are small business loans that are partially guaranteed by the government (the Small Business Administration). These loans are offered through banks (which may also offer conventional loans) and online lenders that partner with the SBA.

The SBA itself does not actually lend the money. However, they guarantee up to 85% of the loan value should a borrower default on the loan, thereby reducing risk to the lender.

How SBA Loans Work

SBA loans work similarly to bank loans. However, since they’re backed by the SBA, they tend to come with broader eligibility requirements, larger loan amounts, and longer repayment terms than conventional business loans.

SBA loans can be secured or unsecured, which means they may or may not require collateral. Even if a particular SBA loan doesn’t ask for collateral, it will likely require you to sign a personal guarantee that you personally will pay the money back even if your business can’t.

The most common SBA loan program is the 7(a) loan program. Like any loan, the SBA 7(a) loans have certain requirements.

•  Your business must qualify as a small business, as the SBA defines it.

•  Your business must be for-profit.

•  You must do business in the U.S.

•  You personally must have invested equity into your business.

•  You must have used other sources of financing, including personal assets.

•  You must be able to demonstrate a need for the funds.

•  You must use the funds for business purposes.

Just as with a conventional business loan, if your application is approved for an SBA loan, you’ll receive a fixed amount and a repayment schedule. Typically, SBA loans have a repayment period of five to 25 years.

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7 Key Differences Between SBA vs Conventional Business Loans

Both conventional business loans and SBA loans are worth considering if you’re seeking financing for your small business. But there are a few key differences to keep in mind.

1. Loan Terms

Conventional business loans typically have repayment terms of up to five years, whereas SBA loans can last as long as 25 years, which could make monthly payments more manageable.

2. Business Loan Collateral

Both conventional and SBA loans often require borrowers to pledge assets as collateral and may use the collateral to determine how much they will lend to a business. The SBA, however, will generally not decline a loan when lack of adequate collateral is the only unfavorable factor.

3. Loan Flexibility

SBA loans can be used for nearly any type of business operating expense (with the exception of paying taxes). Conventional loans, on the other hand, are typically issued for a specific stated purpose.

4. Loan Rates

Both SBA and conventional business loans from a bank offer competitive rates compared to other options (such as short-term business loans from alternative lenders, invoice financing, or merchant cash advances).

5. Loan Requirements

Both conventional business loans and SBA loans typically have stricter requirements than business loans from alternative lenders, but there are some differences between the two.

Banks tend to have high minimum credit score requirements for business loans, and often look for personal credit scores of 680 or higher. Banks may also require that you’ve been in business for at least two years and meet a certain threshold of revenues.

The SBA will not automatically disqualify you from taking out financing just because you have a lower credit score. However, lenders that partner with the SBA often set their own credit score requirements, which can be around 620 to 640 or higher.

6. Loan Approval Process

Here are some pointers on getting your small business loan approved.

The Complications of the Approval Process

The SBA requires a great deal of information about both the borrower and the lender to guarantee the loan. As a result, SBA loans generally require more paperwork than conventional bank loans. With a conventional loan, you only need to meet the bank’s requirements.

Approval Times

Due to the long list of regulatory rules and processes that lenders must abide by, SBA loans typically have longer approval times than conventional loans. As a result, a conventional business loan from a bank will fund faster than an SBA loan.

For small businesses looking for less than $500,000, however, SBA express loans can offer faster approval and funding times.

7. Maximum Loan Amount

Another important difference between an SBA loan and a traditional bank loan is the amount you can borrow, with caps being much higher for SBA loans.

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Pros and Cons of Conventional Business Loans

Next, consider the upsides and downsides of convention business loans.

Pros of Conventional Loans

•  Low interest rates

•  Large loan amounts

•  Competitive repayment terms

•  Application process is less cumbersome than SBA loans

•  Faster funding time than SBA loans

Cons of Conventional Loans

•  Strict eligibility requirements

•  Slower to fund than online loans

•  More paperwork than online loans

•  May require specific collateral

•  May require a personal guarantee

Pros and Cons of SBA Loans

Here are the pros and cons of SBA loans.

Pros of SBA Loans

•  Broad eligibility requirements

•  Low interest rates

•  Long repayment terms

•  High loan amounts

•  Resource centers available to provide general business assistance

Cons of SBA Loans

•  Slow approval and funding process

•  Typically requires down payment

•  Collateral could be required

•  May need to sign a personal guarantee

•  Low-credit applicants are typically not approved

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How to Choose Between Conventional Business Loans and SBA Loans

Both conventional business loans and the options offered through the SBA can provide specific benefits to small business owners in search of funding. What’s most appealing to you may come down to your specific needs and qualifications.

For example, if your business needs a large amount of capital — beyond what your bank can offer — an SBA loan might be a better match. That’s because the SBA loan cap is typically much higher than a bank’s cap. But if you don’t need as much and you already have a relationship with a bank that can offer you a competitive rate, you might prefer to keep all your business financing products with the same lender.

If you’re looking for a loan you plan to pay back quickly, a conventional business loan may be ideal. However, if you prefer to pay less per month but over a longer period of time, you may want to consider an SBA loan.

Your decision will also depend upon which type of financing you qualify for. Some small business owners who don’t qualify for a conventional bank loan may be eligible for an SBA loan.

The Takeaway

Whether you decide on a conventional business loan or a Small Business Administration loan, you’ll want to make sure that you’re getting financing at a rate your business can comfortably afford.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.


Get personalized small business financing quotes with SoFi's marketplace.

FAQ

How difficult is it to get an SBA loan?

Although SBA (Small Business Administration) loans are intended to make low-interest loans more accessible to small business owners, they can still be difficult to get. The SBA has a long list of qualification requirements, and the application process can be labor-intensive. Still, many small businesses can and do get approved for SBA loans.

What are the advantages of an SBA loan?

SBA (Small Business Administration) loans typically come with higher amounts, longer repayment terms, and lower interest rates than most other types of small business loans. Also, credit score and other qualification requirements tend to be less strict than traditional bank loans.

What are the advantages of conventional loans?

Conventional small business loans typically offer large loan amounts, an array of interest rates, and competitive repayment terms. Compared to SBA loans, they can be easier to apply for and faster to fund.


Photo credit: iStock/monkeybusinessimages

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